Introduction to Demand and Supply

Review Reservation prices are the building blocks of demand and supply. In a market economy, price acts as a rationing mechanism. Demand Schedule summarizes buyer behavior. Supply Schedule summarizes seller behavior. The market equilibrium is the price and quantity such that demand equals supply. What have we learned?
Econ 101 M. Salemi Econ 101 M. Salemi

To Take Advantage of the Benefits of Specialization, People Must Trade.

Both Kansas and California can produce beef cattle and grapes. Assume the value of labor and other needed inputs is the same per acre in each state and for each product. In Kansas an acre of land can be used to produce 300 pounds of beef or 100 pounds of grapes. In California, and acre of land can be used to produce 150 pounds of beef or 200 pounds of grapes

Suppose the price of a lb. of grapes is 1.5 lbs. of beef

The Effects of Specialization on Kansas 200 Kansas Opportunities if it Specializes in Beef and Trades for Grapes

Lbs. of Grapes

150

100

50 Kansas Production Possibilities 0 0 50 100 150 200 250 300 Lbs. of Beef per Acre

Econ 101 M. Salemi

Econ 101 M. Salemi

Despite the benefits, Free Trade is Controversial.

Reducing barriers to international trade increases the total value of goods and services produced in each nation. But It does not guarantee that each individual citizen does better when the barriers are reduced.
Econ 101 M. Salemi

Who wins and who loses when the U.S. Imports T Shirts from Vietnam?
Importing T Shirts from Vietnam will likely lower the price of T Shirts in the U.S. Consumers win! U.S. producers of T Shirts now receive a lower price for their product. The lower T Shirt price can translate into a lower wage for T Shirt workers. US Companies and their workers lose!
Econ 101 M. Salemi

Reservation Prices
A buyers reservation price is the largest dollar amount that the buyer would be willing and able to pay for a unit of a welldefined good. A sellers reservation price is the smallest dollar amount for which the seller would be willing able to provide a unit of a welldefined good.
Econ 101 M. Salemi

What is a well-defined good?

To define a good properly and completely, we must specify: Quantity (Pound, Kilogram, Slice, etc.) Quality Time Frame (Per Week, Per Month, etc.) Locale (The size of a market)

Econ 101 M. Salemi

Reservation Prices on EBay

EBay allows prospective buyers to enter a maximum bid. EBay keeps a prospective buyer in the auction until the current bid exceeds his maximum. EBay allows prospective sellers to enter a minimum bid. Although the bidding may start below the minimum, the seller is not obliged to sell unless the final bid exceeds her minimum.
Econ 101 M. Salemi Econ 101 M. Salemi

UC-Santa Cruz T Shirt Auction

UC-Santa Cruz T Shirt Auction

Use clickers to bid. All bids are binding. Bid only in multiples of ten cents. The winner is the highest bidder. In case of ties, the winner will be chosen by random draw. The winner will pay the second highest bid. You should bid your reservation price.

Econ 101 M. Salemi

Econ 101 M. Salemi

What Do You Bid For The UC-SD T Shirt?

Enter your Bid with Your Clicker ... And the Winning Bid Is

Reservation Prices and Demand

Next Class, I will use your bids to derive the class demand schedule for a UCSD T Shirt For now, I will use some made up data to illustrate the concept of demand.

Econ 101 M. Salemi

Demand Schedule
A Demand Schedule shows the quantity of a well-defined good that buyers are willing and able to purchase at each possible price. Consider the following demand schedule for slices of Pepperoni Pizza on Franklin Street on a typical weekday when UNC is in session.
Econ 101 M. Salemi

Demand Schedule for a 10 ounce slice of pepperoni pizza on a September weekday in Chapel Hill
Demand For Pizza
$5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 0 200 400 600 800 1000 1200 1400 1600 Slices of Pepperoni Pizza
Econ 101 M. Salemi

Dollars per Slice

Demand Schedule for Pizza

Demand For Pizza

Suppose 800 slices are available. What price rations the available slices?

$5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 0 200 400 600 800 1000 1200 1400 1600 Slices of Pepperoni Pizza

Dollars per Slice

Use Your Clickers To Answer The Following Graded Question

Econ 101 M. Salemi

Econ 101 M. Salemi

Which of the following best explains why the quantity demanded of a slice of pepperoni pizza falls as the price of the slice rises? It falls because

Supply Schedule
A Supply Schedule shows the quantity of a well-defined good that sellers are willing and able to sell at each possible price. Consider the following supply schedule for slices of Pepperoni Pizza on Franklin Street on a typical weekday when UNC is in session.
Econ 101 M. Salemi

A. The opportunity cost of the slice grows

smaller. larger.

B. The opportunity cost of the slice grows C. Buyers have smaller effective incomes
when the price of pizza rises. D. Sellers have larger effective incomes when the price of pizza rises.
Econ 101 M. Salemi

Supply Schedule for a 10 ounce slice of pepperoni pizza on a September weekday in Chapel Hill
Supply Schedule for Pizza $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 0 200 400 600 800 1000 1200 1400 1600 Slices of Pepperoni Pizza
Econ 101 M. Salemi

Supply Schedule for Pizza

Supply Schedule for Pizza

How much pizza will suppliers supply at a price of $2.75 per slice?

$5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 0 200 400 600 800 1000 1200 1400 1600 Slices of Pepperoni Pizza

Dollars per Slice

Dollars per Slice

Econ 101 M. Salemi

Market Price is a Rationing Mechanism

A good is scarce when there is an insufficient supply of it relative to the desires of a group of prospective consumers. Some mechanism is required to allocate scarce goods among prospective consumers. In a market economy, price is the allocation mechanism. Price separates prospective buyers into two groups: those who get the good and those who do not.
Econ 101 M. Salemi

Market Equilibrium
A system is in equilibrium when there is no tendency for it to change. Can our pizza market be in equilibrium at a price per slice of $2.00? At a price of $2.00, pizza buyers want 800 slices. At a price of $2.00, pizza sellers will sell only 400 slices. What change do you predict will occur?
Econ 101 M. Salemi

At a price of $2.00, Consumers Want 800 slices.

Demand For Pizza
$5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 0 200 400 600 800 1000 1200 1400 1600 Slices of Pepperoni Pizza

At a Price of $2.00, Suppliers will Supply 400 Slices.

Supply Schedule for Pizza $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 0 200 400 600 800 1000 1200 1400 1600 Slices of Pepperoni Pizza

Dollars per Slice

Econ 101 M. Salemi

Dollars per Slice

Econ 101 M. Salemi

Market Equilibrium
A system is in equilibrium when there is no tendency for it to change. In a market, equilibrium price and quantity are the price and quantity for which the quantity demanded equals the quantity supplied. Market equilibrium is modeled as the intersection of the demand and supply schedules.
Econ 101 M. Salemi

Market Equilibrium
Demand and Supply of Pizza
$4.50 $4.00 Dollars per Slice $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 0 200 400 600 800 1000 1200 1400 1600 Slices of Pepperoni Pizza
Econ 101 M. Salemi

Equilibrium

Supply

Demand

Use Your Clickers To Answer The Following Graded Question

As the price of a slice of pizza rises quantity demanded ____ and quantity supplied ______.
A. Rises, Rises B. Rises, Falls C. Falls, Rises D. Falls, Falls

Econ 101 M. Salemi

Econ 101 M. Salemi

In equilibrium, the number of slices that will be denied to consumers even though consumers have a positive reservation price for those slices is
Demand and Supply of Pizza

A. B. C. D.

0 600 1000 1600

Dollars per Slice

Use Your Clickers To Answer The Following Non-Graded Question

$4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 0 200 400 600 800 1000 1200 1400 1600 Slices of Pepperoni Pizza Supply Demand Equilibrium

Econ 101 M. Salemi

Econ 101 M. Salemi

Assignment for Week 3 Recitation

Students will participate in a simulation of a market. They will play the rolls of buyers and sellers of a product. The top earning buyer and top earning seller from each recitation will be entered in a lottery that awards a prize of $20.00. Two students will win a prize of $20.00.
Econ 101 M. Salemi

What Have We Learned?

Reservation Prices are the building blocks of demand and supply schedules. Market Prices ration goods. Demand Schedule summarizes the buyer side of the market Supply Schedule summarizes the supply side of the market. Market Equilibrium occurs at a price where quantity demanded and supplied are equal.
Econ 101 M. Salemi